A question of transparency

Nigel Dawn, a managing director in the Private Equity Funds Group at UBS Securities, argues active portfolio management through secondary trading is becoming a reality.

Nigel Dawn spent the past three years managing UBS’ private equity fund investment portfolio. In 2003, his team achieved an influential $1.3 billion structured secondary joint venture with HarbourVest Partners, a deal that involved the transfer of over 50 UBS partnership investmentst.

Now Dawn, who is based in Stamford, Connecticut, is applying his secondary know-how to working with external clients. He is leading UBS’ push into the secondary advisory business, an area that so far has been the domain of small and independent specialists. It is the first time that an investment bank is looking to leverage private equity expertise, combined with a global footprint, in this fledgling market. We recently met up with Dawn to discuss the rationale behind the bank's plans.

In August, you launched the bank’s Secondary Market Advisory Practice. What prompted this move?

We’re seeing a growing market, and we’re already working on a number of opportunities. The secondary market is now a very healthy environment for sellers. Pricing is attractive, hence more sellers are moving in. If people feel they’re getting fair instead of predatory pricing, current liquidity will drive more liquidity. More assets will trade, and the turnover rate of primary investments, which currently is somewhere between three and five percent per year, will increase.

What we’re also expecting is the advent of active portfolio management in the asset class, of which there still is very little. Just ask an investor today, ‘what is your sell discipline?’ But as more information about the secondary market becomes available, more people will understand that there is really no reason not to use the secondary private equity where appropriate.

What is holding active management back at the moment?

It’s a question of transparency. Secondary liquidity needs to be more readily available to large organisations. This will happen eventually, the question is just who will lead this process. It’s not that the large pension funds don’t want to actively manage their holdings. But the resources are typically not there to be dedicated to this effort.

How can you as an intermediary influence this process?

We are looking to advise owners of private equity who are looking to sell, restructure or acquire assets. Our main focus is on selling. We understand the secondaries market, and we’ve developed particularly deep knowledge about structured transactions, based on our experience with the UBS portfolio. The HarbourVest deal generated quite a bit of interest in the market, and other owners of private equity started approaching us, so it was a natural development for us to set up the practice. And we’re part of UBS’ primary fund placement business, which is a nice complementary fit, with everyone on our team of 35 professionals looking for mandates all the time.

What size transactions are you looking for?

It’s a broad range. Very small mandates can be uneconomical of course, but it also depends on how much work is involved. Take a UBS’ private banking client who needs a solution with a private equity investment: we can find the buyer who will pay the best price for his asset. This is still an inefficient market, with big bid offer spreads. Broking transactions in this way, and connecting parties that would otherwise never find each other, is certainly of interest to us.   

How do the dedicated buyers view the trend towards greater intermediation in secondaries?

It’s a two-edged sword for them. Ideally they want their deal flow to be proprietary, so more efficiency is obviously not something they like. What buyers absolutely like though is an organised process. The secondary sales process is long and complex, and at the outset sellers often don’t understand what they’re getting into. A buyer’s worst nightmare is for a deal to collapse over price at the last minute. That is where we can add great value by giving a clear, upfront indication to the seller of where their asset is going to trade. Once the likely price range is established and understood, that’s the time to start the deal.   

Is the rise of non-traditional buyers a threat to the dedicated houses?

Dedicated secondary buyers sometimes have a higher cost of capital, and so greater strategic interest is going to make it tougher for them to buy assets. At the same time, there will always be deals that only the dedicated houses will be equipped and resourced to handle well.  

Are structured transactions, as opposed to outright sales, going to be the norm?

That depends on the circumstances of the seller. If someone simply wants to sell, current prices mean that now is a good time to do just that. I think that structuring going forward will be less about liquidity and more to do with fresh capital being deployed. For example, there are currently a number of securitisations in the market that are designed to fund new investments. Who knows what sort of volumes such hybrid structures will create, but this is a very interesting development for both potential debt and equity investors in these structures.